A basic concept of homeowners insurance (indeed a basic concept of property-casualty insurance in general) is the “peril.” A peril is defined as an event directly resulting in tangible loss. Whether an insurance claim is approved or denied depends a great deal on what peril or perils were determined to cause the loss in question. Indeed, no claim can be resolved without this determination.
Since there are innumerable things that can go wrong, there are innumerable perils to consider. To clarify matters, most homeowners and other property insurance provides three defined levels of coverage: basic form, broad form and special form.
As its name implies, basic form covers only a few perils on a property. While the exact definition may vary from policy to policy, these perils generally include:
*Fire or lightning
*Removal (i.e. loss resulting from moving property in imminent danger of being lost by another covered peril)
*Windstorm or hail
*Riot or civil commotion
*Vandalism or malicious mischief
Basic form is usually inadequate for a residence premise (i.e. your home). Instead, it generally covers outbuildings such as sheds, barns and workshops, and only then if they don’t qualify for better coverages due to age or condition.
Broad form coverage works the same as basic form, but includes more perils. A typical broad form coverage may include all the perils listed in basic form as well as:
*Weight of ice, snow or sleet
*Accidental discharge or overflow of water or steam FROM WITHIN (that last part is important as I’ll explain later)
*Sudden or accidental failure of water heating or air conditioning systems
*Freezing of plumbing, heating or air conditioning systems
*Sudden and accidental damage due to artificially-generated electricity
Broad form is usually found on older homes and outbuildings which merit better coverage than basic form.
Special form is the best single coverage against perils available. It covers any possible peril EXCEPT those specifically excluded in the policy. So instead of having to choose from a list, a claim on a property loss covered by special form would be honored as long as the peril isn’t one of the events the insurance company said it wouldn’t cover. Special form is the best choice of coverage for any reasonably well-constructed and modern home.
Special form is good, but even it doesn’t cover everything. Most homeowners policies list several exclusions, or perils that aren’t covered under any circumstance. These tend to include:
*Compliance with ordinances and laws
*Wear and tear due to normal use
*Intentional damage by the named insured
Although a homeowners policy may not cover exclusions, coverage can still be obtained for some of these perils. Flood, generally defined as water damage originating outside the property (as opposed to inside, which may be covered), is the best-known homeowners policy exclusion. Separate flood insurance is available nationwide, and indeed may be required if your mortgage holder determines your property is in a high-risk area.
It’s important to note most homeowners policies consider the contents of your home separate from the home itself. While the home may be covered under special form, for example, the contents may only be covered under broad form. Increased coverage may be available for contents.
Particularly valuable items, such as jewelry, collections, artwork or securities, may not be adequately covered under contents. To safeguard these valuables you may want to consider “inland marine” insurance, either as an optional part of your homeowners coverage or as a separate policy. Inland marine insurance covers specific items appraised for a specific value. In other words if you have something valuable enough to appraise separately, you probably have something valuable enough to warrant inland marine insurance.
HOW MUCH IS YOUR LOSS WORTH?
In addition to the three levels of peril coverage, homeowners insurance takes into consideration how much a loss is worth. This is expressed in two ways: actual cash value (ACV) and replacement cost (RP). In the event of a claim items covered as ACV will be deemed to be worth their actual market value at the time of loss. Items covered as replacement cost will be deemed to be worth however much it will cost to replace them. Replacement cost is therefore the better coverage since it’s not as susceptible to depreciation and other related factors.
Bear in mind the preceding are just guidelines. To determine your actual coverages you will need to read your policy. Your insurance company will be able to help you if you have any questions.